Pimco Total Return Fund lagging 87% of its peers this year

Friday, 28 Mar 2014 | 1:54 PM ETReuters

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The Pimco Total Return Fund, the world's largest bond fund, is trailing 87 percent of its peers so far this year, according to Morningstar data issued Friday, in the latest setback for co-founder Bill Gross.

The Pimco Total Return, the Newport Beach, Calif., firm's flagship portfolio, is posting returns of 1.28 percent year-to-date as of March 27, trailing the benchmark Barclays U.S. Aggregate index by 75 basis points for the same period, according to Morningstar.

Pimco, which oversaw $1.91 trillion in assets as of Dec. 31 according to the firm's website, has been in the spotlight since January's announcement that Mohamed El-Erian was resigning as Pimco's CEO and co-chief investment officer.

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Bill Gross

February and March were brutal months for the Pimco Total Return Fund.

Morningstar senior analyst Eric Jacobson said the most important issue that hurt Pimco Total Return's performance in March "may have been that it was a blockbuster month for long maturity bonds and a lousy one for shorter maturities."

The Pimco Total Return Fund, which has $236.5 billion in assets, has been significantly overweight in shorter debt and correspondingly very underweight in long bonds, "so much so in fact that the fund has even been using swaps to achieve a modest short position on the longest maturity debt," Jacobson said.

The Barclays U.S. Treasury 20+ year Index is posting returns of 1.70 percent in March alone, while the Barclays U.S. Treasury 5-7 year Index is -0.61 percent for the same period.

The Pimco Total Return Fund also has long had a significant underweight to investment-grade corporate credit—9 percent in the fund and 22.7 percent in the Barclays Aggregate—which Morningstar's Jacobson said "didn't help either given that the sector outperformed the broader market overall."

Jacobson said the Pimco Total Return portfolio began struggling in February as the fund was "very underweight U.S. investment grade corporate bonds. That would have been a detriment given that the overall investment grade corporate index returned 104 basis points for February, and returns were better the farther down you went on quality."

The fund also cut its effective duration to 4.71 years in February from 5.05 years. Jacobson said the fund's shortening of duration and meaningful underweight to bonds maturing in more than five years and all the way out the yield curve "would probably have been a very meaningful detriment to returns because the 20-plus sector of the Treasury index returned 85-plus basis points for February."

All told, Morningstar's Jacobson reaffirmed its Gold Rating on Pimco Total Return last week saying, "Gross is still one of the best around; modest showings in 2011 and 2013 were disappointing, but expectations of perfection weren't realistic either."